I like to say that the best way to be successful with our investments is to “forget” them.
This is because the biggest risk to our returns is not a recession or a stock market crash, but the person we see when we look in the mirror every morning.
By “forgetting” our investments, we ensure that we don’t get our naughty fingers in them, sell them at the wrong time, and later regret having done so.
Georges, a reader, forgot a placement. In the literal sense of the word. For more than three decades.
“I had purchased an investment in a registered retirement savings plan [REER] in 1990, and I forgot about it while I was working abroad,” he says.
It was only at the end of 2023, while gathering his belongings, that he remembered the existence of this investment.
The amount originally invested was not huge: $2544.02.
George never added or disbursed money. The final amount is the result of investment growth, less management fees, over 33 years. Nothing more, nothing less.
How much was his balance on December 31, 2023? This is where the story becomes sad – or revealing, depending on how you look at it.
The final balance was $7810.40.
First observation: it’s a low yield. That’s an average of 3.45% per year.
You’re going to tell me that it’s not so bad, because he must have made a careful investment. The kind of choice you make when you fear stock market falls and seek the protection of a short-term bond fund, for example.
This is not the case. The fund George owned when he sold his investment was the Mackenzie Bluewater Canadian Growth Fund Series A. This fund holds shares of large Canadian and American companies, and no bonds.
What happened ?
According to Mackenzie, the fund’s annualized compound return since its launch in January 1976 has been 9.7%.
Ian Gascon, president of Placements Idema, notes that this return of 9.7% per year “is net of fees, therefore after management fees”, which are 2.47% per year for this actively managed mutual fund.
If George had obtained such a return between 1990 and 2023, the final amount of his investment would amount to $54,000. Even if he had gotten “only” 7%, the balance would be $23,700, or three times the real value of his account in 2023.
“There’s something wrong!” said Mr. Gascon. Was the fund held in an account that had administration fees, with unit sales periodically to cover those fees? Or have other costs been added over the years? »
Mr. Gascon also hypothesizes that, over such a long period, it is likely that several funds have been combined into the current fund.
Few people realize it, but the mutual fund industry has a habit of periodically “cleaning up” its funds. According to analysis by S&P Dow Jones Indices, “47% of Canadian equity mutual funds merged or liquidated” over a 10-year period ending in 2023.
“This investor may therefore have invested for a long time in a fund which did not do well at all, and which was combined with another fund,” says Mr. Gascon. When this happens, the investor suddenly owns shares of a fund with a good performance history. But his performance history is lower. If this is what happened, it would be a great example of the survivorship bias of mutual funds. »
Without knowing what happened, Georges is not happy about the situation. He asked for clarification from Mackenzie, who informed me that he was working on tracing the sequence of events.
In the meantime, Georges believes he “chose poorly” by investing in a mutual fund with high management fees.
“For me, this forgotten sum was very instructive,” he says.
I know I irritate my friends in the asset management industry by regularly talking about index exchange-traded funds (ETFs) in this column. And I know that the case illustrated here is one person’s experience.
But it’s hard to see how this long-term investor wouldn’t have been better served by a simple index fund with low management fees. He would have simply earned the market’s return for 33 years, based on his appetite for risk. Nothing more, nothing less.
You don’t have to trust my opinion. Trust that of Warren Buffett.
“I believe that the long-term results [d’un fonds indiciel] will be higher than those obtained by most investors – whether pension plans, institutions or individuals – who employ high-fee managers,” wrote billionaire Warren Buffett in his letter to shareholders of 2014.
This is why, upon his death, 90% of the money that Warren Buffett leaves to his wife will be invested in a Vanguard index fund made up of the largest American companies. The rest will be placed in US Treasury bonds.
“Both small and large investors should stick to low-cost index funds,” the famous investor said in his 2017 annual letter.
What do you want, I’m like that. When Warren Buffett speaks, I listen!
Index funds were not common in Canada in 1990, when Georges made his investment. But they existed.
Richard Morin, president of Archer portfolio management, invested in 1991 in the world’s first index ETF, the Toronto Index Participation Security (TIPS).
Launched the previous year by the Toronto Stock Exchange, this fund made up of the largest Canadian companies, and which has since become the iShares S&P/TSX 60 Index ETF (XIU), has experienced an annualized return of 8.54% since 1991. This fund has an annual management fee of 0.18%.
“An investment of $1 in this fund in 1991 is worth approximately $14.94 today, including the reinvestment of dividends,” notes Mr. Morin.
This is not a theoretical calculation. Richard Morin still holds this investment in his registered retirement savings plan (RRSP) brokerage account. He didn’t forget it: 33 years later, he simply never sold it.
If he had owned such a fund, George would have more than $38,000 in his portfolio today, instead of $7,810.40. Even assuming that an annual management fee of 1% was deducted by the advisor who sold him the fund, we arrive at a balance of more than $28,000, or almost four times his actual balance – all that for a similar degree of exposure to the stock market.
The good news is that, like many firms, Mackenzie now offers index ETFs, with annual management fees that can be as low as 0.04%.
The moral of this story: if you forget your investments, make sure you forget them in a fund that is optimal for you.
Otherwise, you might be in for a surprise in a few decades.
The RESP “platinum” strategy
I spoke to you last Sunday about three strategies for taking advantage of the Registered Education Savings Plan (RESP). I explained that the most profitable scenario – and which I described as the “gold medal” – was to invest $50,000 at once, at the birth of your child, and to no longer contribute afterwards. .
Readers have pointed out to me that a “platinum” strategy can offer the hope of obtaining even higher returns. How ? This involves placing part of the $50,000 in the RESP at birth, and letting the other part grow in a non-registered account (if there is more room in the tax-free savings account ( TFSA), RRSP, and no debt).
“Let’s assume the case of an investor with $50,000 to invest and a child who has just been born,” writes Hervé Alaurant. We then invest $16,500 in the RESP the first year, and $33,500 in a non-registered investment, which will be used to make annual contributions of $2,500 to the RESP, and thus receive grants from Quebec and Ottawa.
Assuming a return of 5% after taxes in the non-registered account and 6% in the RESP, we arrive at a result of approximately $156,000 after 18 years. That’s almost $11,000 more than the “gold medal” strategy I suggested.
Undoubtedly, few parents have $50,000 to invest at the time of the birth of a child. But those who have them can have it both ways with this “platinum” strategy.
Several readers also asked if grandparents could contribute to their grandchildren’s RESP. The answer is yes, provided they respect the contribution limits set by the government.
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